W’Bank: Tight Monetary Policy Will Help Stabilise Naira, Attract Foreign Investors

 • Forecasts rebound of Nigerian economy by 2017
• CBN moves to halt naira slide

Obinna Chima
The World Bank has sanctioned Nigeria’s tight monetary policy environment, saying it would help stabilise the naira, strengthen real interest rates, and encourage a return of international investment in the economy.

The Bank also stated that Nigeria’s exchange rate adjustment which was effected in June this year, coupled with the modest improvement in oil prices would help boost the country’s oil revenues in naira terms.

This, in turn, should enable the federal and state governments to meet their financial obligations, including the clearance of salary arrears, and help boost demand, the multilateral donor institution added.

The World Bank stated this in its latest ‘Africa’s Pulse”, the Bank’s twice-yearly analysis of issues shaping Africa’s economic future, for October 2016, which was released yesterday.
The Central Bank of Nigeria (CBN) ditched its 16-month-old peg on the naira in June and introduced a flexible exchange rate regime to allow the currency to trade freely on the interbank market.

But perennial dollar shortage in the economy appear to have frustrated the objective of the central bank as the gap between the interbank FX market and the parallel market has continued to widen.

For instance, while the spot rate of the naira on the interbank FX market closed at N305.31 to the dollar, the naira hit an all-time low of N480 to the dollar on the parallel market yesterday, compared with the N460 to the dollar from the previous day.
The CBN at its Monetary Policy Committee (MPC) a fortnight ago, maintained the benchmark Monetary Policy Rate (MPR) at 14 per cent.

Endorsing the tightening stance adopted by the CBN, the World Bank in the report stated that although the Nigerian economy was facing some challenges, “the economy is expected to rebound moderately in 2017 as the long-delayed expansionary budget begins to be implemented, oil prices stabilise, and oil production increases”.

It noted that policy reforms in the country were helping to improve the environment for private investment, adding that the fuel shortages that had severely impacted activity in the first half of 2016 had eased following an increase in fuel prices.
In its forecast for the continent, the Bank noted that after slowing in 2015, growth in sub-Saharan Africa was expected to weaken further in 2016.

“Growth is projected to fall to 1.6 per cent, from three per cent in 2015, reflecting the effects of an unfavourable external environment and domestic headwinds.
“This represents a downward revision from the growth projection of 3-2 per cent for the region in the April issue of Africa’s Pulse.

“The less favourable forecast reflects the disappointing economic activity in the first half of the year and continued headwinds since then. The outlook for 2017 and beyond is only slightly favourable.
“Despite a recent uptick, commodity prices are expected to remain at low levels, reflecting continuing weak global demand. Although commodity exporters across the region have begun to adjust to lower commodity revenues, the adjustment remains incomplete and at varying speeds.

“Against this backdrop, a modest recovery is expected in the region. Real GDP in sub-Saharan Africa is forecast to grow 2.9 per cent in 2017, before rising moderately to 3.6 per cent in 2018. However, these aggregate growth rates will continue to hide considerable heterogeneity across the region—continuing the pattern of divergent growth speeds.

“While the larger economies and other commodity exporters are expected to see a modest uptick in growth, activity is expected to continue to expand at a solid pace in the rest of the region.
“Private consumption growth in commodity exporters, which weakened significantly over the past two years, is expected to improve gradually.

“The increase in headline inflation and hike in the interest rate by the Central Bank of Nigeria (CBN), which have accompanied the shift to a more flexible exchange rate, have weighed on private consumption in the country,” the World Bank added.

It further stated that Nigeria’s shift to a more flexible exchange rate regime, coupled with the stabilisation of oil prices, was expected to give a boost to government revenue and alleviate public investment cuts, while phasing out fuel subsidies should help contain current expenditures.
Among the region’s three largest economies, Nigeria is expected to endure an economic contraction in 2016, as declining oil production and manufacturing weigh on activities, it added.

The shift to a more flexible exchange rate regime is also expected to encourage some FDI to return.
“Underlying the weak aggregate regional performance is deteriorating economic performance in sub-Saharan Africa’s largest economies – Nigeria and South Africa – which together account for 50 per cent of the region’s output.

“Both countries faced challenging macroeconomic conditions in the first half of the year.
“In Nigeria, the fiscal deficit is projected to widen by more than a third from the 2.8 per cent of GDP recorded in 2015. Excluding Nigeria, fiscal deficits in oil exporters are expected to deteriorate noticeably in 2016,” it added.

Meanwhile, as part of efforts to halt the sustained slide of the naira, commercial bank customers this week received text messages from their respective banks notifying them of a recent regulatory guidance from the CBN on the use of their accounts.

The CBN mandated all customers of financial institutions to use their accounts only for direct personal or company-related transactions and to desist from engaging in any activity that could be perceived as international money transfer operations or bureau de change activities without its approval.
The aim of this directive appears to be geared towards improving foreign exchange supply to the interbank market by discouraging the growing use of personal domiciliary accounts for currency trading.

Commenting on the directive, CSL Stockbrokers Limited said: “Aside these measures, we maintain our view that the CBN needs to allow the naira to truly float freely – which it appears to not be, judging by the increasing spread between the parallel and official markets – for the currency to adjust to a level where demand and supply can and will be balanced.”